Conclusion
This paper has shown that under conditions of both linear and constant price elasticity demand functions, market power as measured by the Lerner index and profit rates may easily move in the opposite direction of the welfare losses from monopoly. This means that changes in monopoly power, as measured by either Lerner indexes or profit rates, are not adequate to predict qualitative changes in allocative inefficiency.
More (less) market power does not necessarily imply more (less) allocative inefficiency whether one is comparing different industries at a point in time or a given industry at different points in time. For these reasons, interpretation of the relation between market power as measured by the Lerner index or profit rates and market performance must proceed with caution.
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References
A. P. Lerner, “The Concept of Monopoly and the Measurement of Monopoly Power,”Review of Economic Studies, Vol. I, June 1934, pp. 157–75.
F. M. Scherer,Industrial Market Structure and Economic Performance, 2nd ed., Chicago, Rand McNally, 1980.
J. S. Bain,Industrial Organization, New York, Wiley, 1959.
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Formby, J.P., Layson, S. Allocative inefficiency and measures of market power. Atlantic Economic Journal 10, 67–70 (1982). https://doi.org/10.1007/BF02300197
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DOI: https://doi.org/10.1007/BF02300197